China's State Firms Cling to Their Cash

By ANDREW BATSON BEIJING -- Getting China to spend rather than save turns out to be harder than it sounds. The nation collectively socks away over half its income, an extraordinarily high rate. By comparison, the average for developed countries is about 21%. Putting more of China's money to work would provide a big boost to the global economy, especially with U.S. consumer spending now constrained by high unemployment and debts. China's high savings show up all over the place: They're piling up not just in household bank accounts, but also in company vaults. Those corporate savings -- basically, profits that haven't been invested or returned to shareholders -- have boomed. On central bank estimates, they rose to 23% of national income in 2007 from 12% a decade earlier. Household savings have stayed at around 20% of income during the same period. The financial strains that push Chinese households to save can be addressed by expanded health care and lower education costs. But high corporate savings are a trickier problem. Much of that money comes from China's resurgent state enterprises, now hugely profitable and dominant in key industries. Taking money away from those powerful state firms and shifting it to consumers would be good economics, many observers think -- and seemingly in line with the socialist principles of China's government. But such changes are politically difficult: They threaten the interests of enormous corporations and perhaps even the ideas driving China's hybrid command-market economy. "On the surface, it's a technical question. But in reality, it's a very political question," said Liu Jipeng, a professor at the China University of Political Science and Law. China's large state sector helped it bounce back more quickly from the financial crisis than Western countries, he argues, so the government should be strengthening state firms, not sucking them dry. After a wave of closures in the late 1990s, the government has enthroned a smaller number of strong state firms at the commanding heights of China's economy. There are now three oil companies, three phone companies, two electricity distributors -- all majority owned by the state. The profits of state firms were rising more than 30% a year before the crisis, and their strength is increasingly visible. They've been building lavish new headquarters in Beijing, and on average pay their employees 82% more than private firms. Chinese officials flubbed their first attempt to extract some savings from these cash-rich state enterprises. A requirement for state firms to pay a new dividend to the government has had little impact since its launch in 2008, bringing in revenue of just 0.2% of gross domestic product. And most of the money was used to aid state companies themselves, not support consumers. "State-owned enterprise managers are a very powerful group in the policy debate. So the State Council [or cabinet] has moved very cautiously in implementing this reform," said Zhang Chunlin, private-sector development specialist in the World Bank's Beijing office. Scholars and government officials are debating changing this dividend policy. Many argue that the current payout of 5% to 10% of profits should be increased. And there's also a push for putting the money into the general government budget, where it could support social programs rather than fill a slush fund for state enterprises. Many outside the country also see a shift in this dividend policy as key to making China a more consumption-driven economy. The U.S. Treasury and the International Monetary Fund have both urged China to take more money out of the pockets of state firms and use it to support household incomes. Even supporters are not optimistic that these changes will come quickly. An overhaul to the dividend policy could threaten the agency that now administers it -- the State-owned Assets Supervision and Administration Commission, or SASAC -- and cause resistance in the bureaucracy. "Scholars have put forward a lot of suggestions, but I think there is zero possibility of changing the dividend policy this year. And next year also," said Wen Zongyu, a researcher at the Ministry of Finance's think tank. A gradual approach is more likely to win support, he said, with changes phased in at the end of the dividend policy's initial three-year trial period. Perhaps not by coincidence, 2011 would also be close to the end of the current administration's term -- so the tough calls could be pushed off even further. Write to Andrew Batson at andrew.batson@wsj.com http://online.wsj.com/article/SB125953211574968639.html#mod=todays_us_page_one